Start Phasing Out The Sell-Then-Build

The HBA argues that the industry should start getting ready for the mandatory phase-in of BTS by 2015 Posted Date: Sep 15, 2011By: HBA

The HBA argues that the industry should start getting ready for the mandatory phase-in of BTS by 2015

The subject of abandoned housing projects has been a bane for the house-buying public at large in Malaysia. Hundreds of thousands of house buyers and their families are left suffering in the wake of such abandoned projects where they have paid a lot of money and not get their houses. Most of them are compelled to continue servicing the housing loans that their banks had disbursed to the developers while they continue to live in rented houses!

This is indeed disgusting for a country that claims to have a caring society. So much for “People First, Performance Now.” The government had spent huge sums of taxpayers’ money to revive some of these failed projects. Some of these abandoned projects are the results of fraud and deceit. How else can we explain that in many of these cases, the land and the houses (although uncompleted), become net liabilities to the extent that the cost of reviving them requires large amount of money.

Even so-called “white knights” are reluctant to go near most of these failed projects. In property development, any construction put onto a piece of land will progressively enhance its value. Full value is attained when the houses are completed. Thus the fact that a large number of these abandoned projects become financially not viable for revival only indicates that their developers have been paid more than what the construction stage entitles them to and/or that the money collected from buyers are channelled elsewhere instead of towards the completion of the projects.

In both of these cases, fraud is involved and in any case, the buyers are the ones who suffer most although the banks involved are also put in a quandary.

Home completion guarantee scheme (insurance)!

Recently, the Real Estate Housing Developers’ Association (REHDA) has proposed the setting up of a home completion guarantee scheme (insurance). In this scheme, participating developers are required to contribute 0.25% (that is 1 quarter of a percent!) of their construction costs (not project value) so that their buyers can be assured of getting their houses.

REHDA even suggested that taxpayers’ money be used to augment this insurance scheme. We have elucidated on the practicality of this proposed scheme. Then again the question to ask is which insurance company will insure against business loss?

Timeline for making BTS 10:90 mandatory

In 2006, the then Deputy Prime Minister YAB Dato’ Seri Najib Tun Razak announced that the Build-Then-Sell 10-90 scheme would be put on trial for a period of 2 years. Also announced were a host of incentives to encourage developers to adopt this system that basically insulates buyers from the hazards of abandoned projects (plus a host of other advantages, little highlighted in the media).

Hence the benefits of the BTS (10-90) need no further elucidation because the government has deemed it fit to the extent of offering incentives to encourage developers to adopt the system. But alas, the system was left to the option of developers with the present hazardous Sell-Then-Build (STB) still very much alive and creating havoc!

For obvious reasons, developers are adamant about sticking to the STB despite the attractive incentives. It is high time that a firm timeline be established for the industry to progress to the BTS 10-90.

Market or developer-driven

REHDA has repeatedly stressed that the choice of either STB or BTS (10-90) should not be compelled but should be “market driven”. We would like to point out that this present option of either STB or BTS (10-90) definitely cannot be termed as “market-driven” but more “developer-driven”! It is solely the developers who make the choice, not house buyers or any other party, for that matter.

Is it surprising then that there had been few, if any, who voluntarily chose the BTS(10-90)? The reasons are obvious. REHDA went further to state that after 3 years of trial period, the system has proved to be unworkable! We would like to state that the BTS (10-90) has never be given a chance to see daylight (and industry players make sure of that!) because it was given as an option.

Thus the system in effect, was never put to test against the prediction of doom and all the other frighteners put forward by interested parties in defending their turf. Thus unless the government put in a time-line for the industry to adopt the system in order to get rid of the problems once and for all, the following will prevail:

1 The house-buying Rakyat will continue to face the Russian Roulette every time someone buys a new house. (Presently 8% of housing projects are categorised as “problematic”!)

2 Poor/unacceptable quality houses will continue to rule the day.

3 Taxpayers’ money will continue to be channelled to revive such projects against a backdrop of fraud, deceit and only in some cases, genuine business failures.

4 The government will continue to face the wrath of frustrated buyers who are unfortunate to be trapped in abandoned projects.

5 The industry will continue to attract bogus/questionable developers due to its low entry barrier.

6 Our image abroad will continue to be adversely looked at from the eyes of property investors and potential participants of the Malaysia My Second Home (MMSH) programme.

7 Banks (both bridging and end-financiers) will continue to grapple with the problem of loan defaults when house buyers are unable to pay back because they never got their houses!

8 Large amount of funds will continue to be made dormant when tied up in abandoned projects.

9 Our beautiful skyline will continue to be dotted by ugly abandoned project sites with the attending health and social problems.

Joint venture land owners will continue to face the possibility of not getting the promised returns from their land.

Finally, recently, the Minister of Housing & Local Government has announced that the BTS 10:90 will be made mandatory by the year 2015. The housing market must get ready for the gradual phasing out of this outdated and hazardous STB and look forward to the gradual phase-in of the BTS (10-90) system. That’s only four (4) years time to put in place orderliness in the housing arena.

In the next article, we will dwell on the issue of ‘Financing mechanics of the STB and BTS 10:90 concept’.

Robert Tan views that banks have a big role to play to complement government’s efforts to promote housing development laws for the protection of house buyers. He is a Legal Adviser of the National House Buyers Association.